A PROJECT ON

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COMPARATIVE ANALYSIS OF INTERNATIONAL BANKING AND INDIAN BANKING (BANKING LAW)

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SUBMITTED TO: Dr. Ajay Kumar (Faculty of BANKING LAW)

SUBMITTED BY: SAGRIKA ROLL NO. - 450 8TH SEMESTER 4th YEAR

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ACKNOWLEDGEMENT
I specially owe my gratitude to DR. Ajay Kumar (Faculty: Banking Law), for providing me this opportunity to work on the project COMPARATIVE
ANALYSIS OF INTERNATIONAL BANKING AND INDIAN BANKING, and who was kind enough to

give me academic support and advice from time to time. I am highly indebted to my family members for giving me their full cooperation, mental support and their love and affection. Lastly, I would like to express my deep sense of appreciation to everybody directly or indirectly involved in this project work, all through the making of it.

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RESEARCH METHODOLOGY
Aims and Objectives: The aim of the project is to present a detailed study of the topic COMPARATIVE ANALYSIS OF INTERNATIONAL BANKING AND INDIAN BANKING through decisions and suggestions and different writings and articles. Sources of Data: The following secondary sources of data have been used in the project1. Articles/Journals/Documents/Year Books 2. Books 3. Websites

Method of Writing and Mode of Citation: The method of writing followed in the course of this research paper is primarily analytical. A Uniform method of citation has been followed throughout the course of this research paper.

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TABLE OF CONTENT
Introduction....05
International banking system (purpose)06 History of bank..07

Analysis of International Banking and Indian banking..08 Basel agreement II.08 Containment of Financial Leverage of Banks Impact on Indian Banks.10 Reducing the Pro-cyclicality of Financial Sector Regulation: BCBS Proposals...10 Liquidity Risk Management: BCBS Proposals11 Dealing with Systemically Important Financial Institutions (SIFIs) : BCBS Proposals....12 Regulation of Compensation Practices of Banks: Indian Perspective.13 International Financial Reporting Standards (IFRS): Reform Proposals....14 Macroeconomic Impact of the proposed BCBS Reforms.15 Implementation of Basel III in India...16

Conclusion.17 Bibliography..18

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INTRODUCTION
A bank is a financial institution and a financial intermediary that accepts deposits and channels those deposits into lending activities, either directly or through capital markets. A bank connects customers that have capital deficits to customers with capital surpluses. The business of banking is in many English common law countries not defined by statute but by common law, the definition above. In other English common law jurisdictions there are statutory definitions of the business of banking or banking business. When looking at these definitions it is important to keep in mind that they are defining the business of banking for the purposes of the legislation, and not necessarily in general. In particular, most of the definitions are from legislation that has the purposes of entry regulating and supervising banks rather than regulating the actual business of banking. However, in many cases the statutory definition closely mirrors the common law one. Examples of statutory definitions: "banking business" means the business of receiving money on current or deposit account, paying and collecting cheques drawn by or paid in by customers, the making of advances to customers, and includes such other business as the Authority may prescribe for the purposes of this Act; (Banking Act (Singapore), Section 2, Interpretation). "banking business" means the business of either or both of the following: receiving from the general public money on current, deposit, savings or other similar account repayable on demand or within less than [3 months] ... or with a period of call or notice of less than that period; paying or collecting checks drawn by or paid in by customers. Since the advent of EFTPOS (Electronic Funds Transfer at Point Of Sale), direct credit, direct debit and internet banking, the cheque has lost its primacy in most banking systems as a payment instrument. This has led legal theorists to suggest that the cheque based definition should be broadened to include financial institutions that conduct current accounts for customers and enable customers to pay and be paid by third parties, even if they do not pay and collect checks.1 English Banking: Bank of England The Bank of England is the central bank of the United Kingdom. Sometimes known as the 'Old Lady' of Thread needle Street, the Bank was founded in 1694, nationalised on 1 March
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e.g. Tyree's Banking Law in New Zealand, A L Tyree, LexisNexis 2003, page 70 .

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1946, and gained independence in 1997. Standing at the centre of the UK's financial system, the Bank is committed to promoting and maintaining monetary and financial stability as its contribution to a healthy economy. The Bank's roles and functions have evolved and changed over its three-hundred year history. Since its foundation, it has been the Government's banker and, since the late 18th century, it has been banker to the banking system more generally - the bankers' bank. As well as providing banking services to its customers, the Bank of England manages the UK's foreign exchange and gold reserves. The Bank has two core purposes - monetary stability and financial stability. The Bank is perhaps most visible to the general public through its banknotes and, more recently, its interest rate decisions. The Bank has had a monopoly on the issue of banknotes in England and Wales since the early 20th century. But it is only since 1997 that the Bank has had statutory responsibility for setting the UK's official interest rate. Interest rate decisions are taken by the Bank's Monetary Policy Committee. The MPC has to judge what interest rate is necessary to meet a target for overall inflation in the economy. The inflation target is set each year by the Chancellor of the Exchequer. The Bank implements its interest rate decisions through its financial market operations - it sets the interest rate at which the Bank lends to banks and other financial institutions. The Bank has close links with financial markets and institutions. This contact informs a great deal of its work, including its financial stability role and the collation and publication of monetary and banking statistics. The Bank of England is committed to increasing awareness and understanding of its activities and responsibilities, across both general and specialist audiences alike. It produces a large number of regular and ad hoc publications on key aspects of its work and offers a range of educational materials. The Bank offers technical assistance and advice to other central banks through its Centre for Central Banking Studies, and has a museum at its premises in Thread needle Street in the City of London, open to members of the public free of charge. Core Purpose In pursuing its goal of maintaining a stable and efficient monetary and financial framework as its contribution to a healthy economy, the Bank has two core purposes; achieving them depends on the work of the Bank as whole. This part of the website describes and explains each core purpose and some of the work that is undertaken to achieve them. This material
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adds to that provided on the 'About the Bank' main page. Other parts of the website provide more information about each of the Bank's activities. Price stability and monetary policy

The first objective of any central bank is to safeguard the value of the currency in terms of what it will purchase at home and in terms of other currencies. Monetary policy is directed to achieving this objective and to providing a framework for non-inflationary economic growth. As in most other developed countries, monetary policy operates in the UK mainly through influencing the price at which money is lent, in other words the interest rate. The Bank's price stability objective is made explicit in the present monetary policy framework. It has two main elements: an annual inflation target set each year by the Government and a commitment to an open and accountable policy-making regime. Financial Stability

The Bank of England has played a key role in maintaining the stability of the United Kingdom's financial system for 300 years and it is now a core function of most central banks. A sound and stable financial system is important in its own right and vital to the efficient conduct of monetary policy. Since 1997, the Bank of England has had responsibility for the stability of the financial system as a whole, while the Financial Services Authority (FSA) supervises individual banks and other financial organisations including recognised financial exchanges such as the London Stock Exchange. Memorandum of Understanding In October 1997, a Memorandum of Understanding between the Bank, Her Majesty's Treasury and the FSA was agreed. This formalised the allocation of responsibilities for regulation and financial stability in the UK. It made provisions for the establishment of a high level Standing Committee to provide a forum in which the three organisations could develop a common position on any problems which may emerge. An updated Memorandum was issued in 2006 The Bank's contribution to the Standing Committee on financial stability issues is informed by the operations of the Bank's Financial Stability Executive Board - a high-level internal body providing guidance on priorities and the direction of work in the Financial Stability
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area. The Board is chaired by the Bank's Deputy Governor for Financial Stability and generally meets on a monthly basis. History of Banks The Bank of England was founded in 1694 to act as the Government's banker and debtmanager. Since then its role has developed and evolved, centred on the management of the nation's currency and its position at the centre of the UK's financial system. The history of the Bank is naturally one of interest, but also of continuing relevance to the Bank today. Events and circumstances over the past three hundred or so years have shaped and influenced the role and responsibilities of the Bank. They have moulded the culture and traditions, as well as the expertise, of the Bank which are relevant to its reputation and effectiveness as a central bank in the early years of the 21st century. At the same time, much of the history of the Bank runs parallel to the economic and financial history, and often the political history, of the United Kingdom more generally.

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Analysis of banking Systems Of International and Indian Banking

BASEL AGREEMENT II The role of Basel II, both before and after the global financial crisis, has been discussed widely. While some argue that the crisis demonstrated weaknesses in the framework, others have criticized it for actually increasing the effect of the crisis. In response to the financial crisis, the Basel Committee on Banking Supervision published revised global standards, popularly known as Basel III. The Committee claimed that the new standards would lead to a better quality of capital, increased coverage of risk for capital market activities and better liquidity standards among other benefits. Nout Wellink, former Chairman of the BCBS, wrote an article in September 2009 outlining some of the strategic responses which the Committee should take as response to the crisis. He proposed a stronger regulatory framework which comprises five key components: (a) better quality of regulatory capital, (b) better liquidity management and supervision, (c) better risk management and supervision including enhanced Pillar 2 guidelines, (d) enhanced Pillar 3 disclosures related to securitization, off-balance sheet exposures and trading activities which would promote transparency, and (e) cross-border supervisory cooperation. Given one of the major factors which drove the crisis was the evaporation of liquidity in the financial markets, the BCBS also published principles for better liquidity management and supervision in September 2008. A recent OECD study suggest that bank regulation based on the Basel accords encourage unconventional business practices and contributed to or even reinforced adverse systemic shocks that materialised during the financial crisis. According to the study, capital regulation based on risk-weighted assets encourages innovation designed to circumvent regulatory requirements and shifts banks focus away from their core economic functions. Tighter capital requirements based on risk-weighted assets, introduced in the Basel III, may further contribute to these skewed incentives. New liquidity regulation, notwithstanding its good intentions, is another likely candidate to increase bank incentives to exploit regulation. Think-tanks such as the World Pensions Council have also argued that European legislators have pushed dogmatically and naively for the adoption of the Basel II recommendations,

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adopted in 2005, transposed in European Union law through the Capital Requirements Directive (CRD), effective since 2008. In essence, they forced private banks, central banks, and bank regulators to rely more on assessments of credit risk by private rating agencies. Thus, part of the regulatory authority was abdicated in favor of private rating agencies. The whole subject of international banking regulation, and in particular the topic of capital standards for large banks, may seem a bit untimely just now, what with Europes b anks at the brink of collapse even though regulators declared them amply capitalized just weeks ago. Given that recent history, its tempting to write off the debate over capital standards as not only eye-glazing but fundamentally irrelevant. But manipulable and difficult to enforce as they may be, capital standards are one of the best regulatory tools for promoting financial stability, because holding substantial capital is one of the few things banks can do that actually helps them withstand panics. Regulators can, and should, design deposit insurance schemes and resolution mechanisms to deal with bank failures; a firm capital base, though, protects banks from failing in the first place. A collection of cartoons about international news. Indeed, Europes current plight merely reinforces the point. And the job of devising better capital standards on a global scale falls to the international negotiation process known as Basel III . The latest Basel III agreement is due for submission to world leaders Thursday at the Group of 20 summit conference in Cannes, France. The good news is that Basel III produced a consensus in favor of stronger capital requirements; by 2019, banks will have to hold at least 7 percent of their assets in common equity and retained earnings. Controversy still rages, however, about a proposal to make two dozen or so giant global banks, known as systemically important financial institutions, hold even more capital than that. The idea is that this capital surcharge helps protect against the risk that the downfall of a huge and widely interconnected institution could bring the world financial system down with it. Not only that, but the surcharge will be adjusted (within a range) depending on how globally risky regulators judge a particular bank to be. This is a disincentive to bigness as such one of the rules advantages, according to Federal Reserve Chairman Ben S. Bernanke. Not surprisingly, bankers are pushing back, led by Jamie Dimon of JPMorgan Chase, who argues that the proposed surcharge is not only unnecessary but discriminatory against U.S. banks, in part because, as recent experience shows, European regulators are more lenient about capital than their U.S. counterparts.
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The bankers have a point: There is an inherent tradeoff between tighter bank regulation and the availability of credit. Higher capital requirements function, economically, as a tax. To the extent banks must keep more of their resources in reserve, they are less able to lend to jobcreating businesses, so they are probably right to point to various studies suggesting that higher capital standards would retard growth to some extent. Whats harder to calculate, of course, are the risk of crisis that may go along with too much lending and the value of preventing crises. But we know one big lesson of the financial crisis is that everything is riskier than it seems, or at least it might be. Regulators are wise to err on the side of caution, and to add a capital surcharge to systemically important institutions. Yes, its hard to define such institutions precisely, as Mr. Dimon and others protest but not impossible. A tougher question is whether the surcharge should be a flat percentage applied to all systemically important institutions or whether, as proposed, regulators should graduate it according to more refined criteria. The regulators argument is that they do not want to create a sharp difference in policy toward two banks that present almost the same risk profile. But linedrawing problems come up no matter how you attempt to make distinctions. As Basel III moves from the drawing board to full implementation by member countries, the authorities will have to show that it is truly adding safety and soundness, and not just more complexity. The crisis has exposed several flaws in the quantitative risk management models used by banks. One of the flaws is the inability of the models to capture the market risk in their trading book positions, particularly under stressed conditions. This is sought to be corrected by requiring that the capital calculations be made on parameters calibrated to stressed conditions. The last decade witnessed a quantum jump in the derivatives activities of banks leading to a phenomenal rise in counterparty credit risk. One of the shortcomings of the prevailing Basel II framework is that it does not fully capture the unexpected rise in counterparty exposures under stressed conditions. Besides, during the crisis we saw the financial condition of counterparties worsen at the same time when they suffered losses on their derivatives transactions, leading to the so called wrong way risk. The counterparty credit risk framework of Basel II is being revised to address these concerns. Containment of Financial Leverage of Banks Impact on Indian Banks Estimates show that the leverage in the Indian banking system is quite moderate. In the BCBS deliberations, we argued that the SLR portfolio of our banks, which is a regulatory
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mandate, should be excluded from the calculation of the leverage ratio as this carries only a moderate risk (i.e. no credit risk and only market risk). However, BCBS took an in-principle position that no assets, inlcuding cash which obviously has the least risk, should be excluded from the measurment of the leverage ratio. Nevertheless, since the Tier 1 capital of many Indian banks is comfortable (more than 8%) and their derivatives activities are also not very large, we do not expect the leverage ratio to be a binding constraint for Indian banks. Reducing the Pro-cyclicality of Financial Sector Regulation: BCBS Proposals Critics contend that a major flaw of the Basel II capital regulations is their inherent procyclicality. The procyclicality debate came into sharp focus during the crisis. Banks found themselves constrained in lending by already shrunk capital ratios owing to losses when more lending would, in fact, have helped in containing the downturn. To minimise the procyclical effects, BCBS has proposed to: (a) base the calculation of capital on more conservative estimates of default probabilities, (b) promote more forward looking provisions, (c) conserve capital to build capital buffers at individual banks and the banking sector that can be used under stress, and (d) manage system-wide risk by containing excess credit growth. The concept of making countercyclical provisions and establishing capital buffers simply implies that banks should build up higher levels of provision and capital in good times which could be run down in times of economic contraction consistent with safety and soundness considerations. This will be done by defining buffer ranges above the regulatory minimum capital requirement. The concept has an intuitive appeal. Operationalizing it though is a complex task and poses many challenges. The first and foremost challenge is the difficulty of identifying the inflection point in an economic cycle based on objective and observable criteria which would indicate when to begin building up a capital buffer and when to start using it. Second, what economic indicator do we use? It is difficult to identify a single macroeconomic variable that can be a reliable indicator of both good and bad times. For instance, credit growth could be a good indicator of the build up phase but credit contraction is usually a lagging indicator of emerging strains in the system. Third, any approach to creating a capital buffer whose size varies with the economic cycle poses the challenge of defining an economic cycle in a global setting as economic cycles are not globally synchronised. Fourth, experience shows that vulnerabilities build up gradually, often over several years, but distress emerges quite rapidly. Hence, the capital buffer may have to be released rather abruptly. Fifth, determining the right size of a capital buffer is both a difficult task and also a contentious issue; it will need to be large enough to absorb losses in a
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downturn and still enable banks to continue lending but not so large as to make the insurance against failure too expensive. Finally, any scheme of capital buffers needs to be simple and transparent, entail low implementation costs and be as rule-based as possible. Can we design a framework for reducing procyclicality that meets all these requirements? BCBS is working on addressing all these issues. It must be recognised though that, given the different structures and stages of development of financial systems across countries, it will be absolutely essential to allow national discretion in applying the framework. Reducing the Pro-cyclicality of Financial Sector Regulation : Indian Perspective the proposed measures to contain the procyclicality of financial sector regulations through capital buffers and provisioning will impose additional costs on banks. Apart from the general concern in this regard, in India we have an additional concern about the variable used to calibrate the countercyclical capital buffer. The most widely discussed candidate for this is the credit to GDP ratio. Using the credit GDP ratio is, however, problematic. Unlike in advanced economies where this ratio is stable, in emerging economies such as India, it will likely go up for structural reasons enhanced credit intermediation owing to higher growth as well as efforts at deepening financial inclusion. In fact, a study undertaken by the Reserve Bank shows that the credit to GDP ratio has not historically been a good indicator of build up of systemic risk in our banking system. Furthermore, some economic sectors such as real estate, housing, micro finance and consumer credit are relatively new in India, and banks have only recently begun financing them in a big way. The risk build up in such sectors cannot accurately be captured by the aggregate credit to GDP ratio. We have therefore used sectoral approaches to countercyclical policies, and I believe we need to continue to use them. To effectively deploy countercyclical measures, we also need to improve our capabilities to predict business cycles at the aggregate and sectoral levels, and identify them in real time. This will require better quality of economic and financial data as well as improved analytical capabilities. Liquidity Risk Management: BCBS Proposals The financial turmoil highlighted the feedback loops through which institutional liquidity constraints cascade into systemic solvency crises because of interconnectedness. A typical chain reaction runs as follows. An institution gets into a liquidity problem, is unable to tide over that because of a hostile funding environment, indulges in fire sale of its assets to generate liquidity, incurs losses in the process which makes raising funding even more
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difficult and is then forced into further fire sales. This leads to a sharp drop in asset prices and the pressures transmit rapidly, and then explosively, to other banks and financial institutions pulling the whole system into a death spiral. The BCBS proposals involve two regulatory standards for managing liquidity risk: (i) a Liquidity Coverage Ratio to ensure resilience over the short term; and (ii) a Net Stable Funding Ratio to promote resilience over the longer term. Reckoning that there is wide diversity in the measures used by supervisors for monitoring the liquidity risk, the new proposals also include a set of common liquidity-risk monitoring tools. Liquidity Risk Management: Indian Perspective. The major challenge for banks in India in implementing the liquidity standards is to develop the capability to collect the relevant data accurately and granularly, and to formulate and predict the liquidity stress scenarios with reasonable accuracy and consistent with their own situation. Since our financial markets have not experienced the levels of stress that advanced country markets have, predicting the appropriate stress scenario is going to be a complex judgement call. On the positive side, most of our banks follow a retail business model and also have a substantial amount of liquid assets which should enable them to meet the new standards. There is an issue about the extent to which statutory holdings of SLR are counted towards the proposed liquidity ratios. An argument could be made that they should not be counted at all as they are supposed to be maintained on an ongoing basis. However, it would be reasonable to treat at least a part of the SLR holdings in calculating the liquidity ratio under stressed conditions, particularly as these are government bonds against which RBI provides liquidity. Dealing with Systemically Important Financial Institutions (SIFIs) : BCBS Proposals BCBS is engaged in evolving an appropriate framework for dealing with systemically important banks and financial institutions in the international context. This involves a host of tasks: development of indicators of systemic risk, identification of systemically important financial institutions (SIFIs), differential systems for SIFIs by way of capital and liquidity surcharge and enhanced supervision, improving the capacity to resolve SIFIs without recourse to taxpayer money, reducing the probability and impact of a SIFI failure, strengthening the core financial market infrastructure to reduce contagion risks if failure occurs and improving the oversight of SIFIs. Even if we accept that SIFIs should be subject to some additional regulation on top of the base level regulations, there are several issues that need to be addressed in fleshing out the necessary framework. The first issue is of evolving objective criteria for identifying systemically important institutions. Second, how do we apply the criteria since the systemic importance of an institution is likely to be time-varying
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and state-dependent as per the economic environment? Finally, drawing a sharp distinction between a SIFI and a non-SIFI requires considerable judgement and has a moral hazard downside. Containment of Systemic Risk: Indian Perspective The framework for identification of SIFIs that will evolve is expected to be applicable uniformly to all countries. India will also need to adopt that. The identification under the BCBS framework will happen from an international perspective, and we need to do a supplementary exercise to identify SIFIs in the domestic context even if they are not in the international list. In either case, if the proposal for levying systemic risk capital and liquidity charge is eventually agreed upon, a few Indian banks may be called upon to maintain additional capital and liquidity charges. Then there is the issue of resolution of SIFIs in the event of failure. We also need to promote structures which make such resolutions smooth and orderly. The recent Reserve Bank initiative to constitute a working group to examine the suitability of financial holding companies in India is a step in this direction. RBI has also been constantly upgrading the regulatory and supervisory framework for financial conglomerates. Efforts are also under way to bring a larger number of financial transactions within the ambit of multilateral settlement through central counterparties. Regulation of Compensation Practices of Banks: BCBS Proposals It is now widely acknowledged that the flawed incentive framework underlying the compensation structures in the advanced country banking sectors fuelled the crisis. The performance-based compensation of bank executives is typically justified on the ground that banks need to acquire and retain talent. We now know, with the benefit of hindsight, that the compensation framework overlooked the perverse incentives it would engender. Bank executives focused too much on short-term profits and compromised long term interests with disastrous consequences. The Financial Stability Board has since evolved a set of principles to govern compensation practices and the Basel Committee has developed a methodology for assessing compliance with these principles. The proposed framework involves increasing the proportion of variable pay, aligning it with long-term value creation and instituting deferral and claw-back clauses to offset future losses caused by the executives. Regulation of Compensation Practices of Banks: Indian Perspective

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Since 70 per cent of our banking sector is accounted for by public sector banks where compensation is determined by the government, and where the variable component is very limited, the proposed reform to compensation structures is relevant in India only to the remaining 30 per cent of the non-public sector industry segment. Private, foreign and local area banks in India are statutorily required to obtain RBIs regulatory approval for the remuneration of their wholetime directors and chief executive officers. In evaluating these proposals in respect of Indian banks, Reserve Bank has historically ensured that the compensation is not excessive, is consistent with industry norms, is aligned to the size of the banks business and that the variable pay component is limited. In respect of foreign banks, the Reserve Bank has largely gone by the recommendation of the banks head office. However, reflecting the spirit of the global initiative on compensation structures, we determined that there is need for reform in India too towards aligning compensation structures to FSB principles. Accordingly, in July 2010, RBI issued draft guidelines on Compensation of Whole Time Directors/Chief Executive Officers /Risk Takers and Control Staff inviting public comments. The intent behind the guidelines is to encourage banks to ensure effective governance of compensation, align the compensation with prudent risk taking, improve supervisory oversight of compensation and facilitate constructive engagement by all stakeholders. The guidelines require banks boards to formulate and adopt a comprehensive compensation policy covering all employees (risk takers and control/compliance staff). We have advised that variable pay should be risk aligned, but we have not proposed any limit on the variable components. As regards foreign banks, we will require them to submit an annual declaration that their compensation structure in India is in conformity with FSB principles and standards. As I have said earlier, the remuneration and incentive structure of public sector bank executives are determined by the Government. The executive compensation in the public sector, as is well known, is lower than that in the private sector. Notwithstanding the historical reasons for this, there is perhaps a good reason to revisit this. If public sector banks are required to compete with private banks on a level playing field, there is a good case for compensating them too on a competitive base. There is also the risk that if the public sector bank compensation is not improved, the public sector may lose talent to the private sector. International Financial Reporting Standards (IFRS): Reform Proposals

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In the wake of the crisis, fair value accounting has come in for criticism for its inadequacy to deal with the typical features of a financial crisis: illiquid markets and distress sale of assets. It is argued that fair value accounting, no matter that it has logical appeal, is too rigid for a crisis situation and that it, in fact, fuels a downturn. The G-20 Working Group on Enhancing Sound Regulation and Strengthening Transparency recommended that the accounting standards setters and prudential supervisors should work together to identify solutions that are consistent with the complementary objectives of promoting the stability of the financial sector and improving the transparency of results in the financial reports. Accordingly, the IASB has initiated appropriate modifications to the relevant accounting standards. International Financial Reporting Standards (IFRS) Indian Perspective For banks in India, the Accounting Standards issued by the Institute of Chartered Accountants of India (ICAI) together with the prudential regulations of the Reserve Bank constitute the framework of the Indian GAAP (Generally Accepted Accounting Principles). Given Indias growing global integration, the ICAI recognized the need for Indian companies to converge to global standards in presenting their financial results. The Core Group appointed by the Ministry of Corporate Affairs (MCA) has since put out phased road maps for convergence of Indian corporates and banks with IFRSs. Accordingly, scheduled commercial banks in India will have to adopt the converged Indian Accounting Standards for preparing their opening balance sheets as at April 1, 2013. In moving towards convergence with the IFRSs, there will be challenges for Indian banks. First, the Accounting Standard IFRS 9 relating to financial instruments, which is the crucial standard for banks, is itself still evolving and thus convergence with IFRS becomes a moving target. Second, the IT systems of banks which are programmed to producing financial results as per Indian GAAP will need to be modified. Third, as for any other new venture, banks will need to build capacity for making a seamless transition to the new standards and for the adoption of the expected-loss approach to loan loss provisioning. The Reserve Bank has constituted a Working Group to address the implementation issues and to formulate operational guidelines to facilitate the convergence of the Indian banking system with the IFRS. The members of the Group include representatives from the Indian Banks' Association (IBA), the Institute of Chartered Accountants of India (ICAI) and various regulatory and market related departments of the Reserve Bank. Besides, professionals with core competence, expertise and experience in IFRS implementation have been drafted in as special invitees.

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Macroeconomic Impact of the proposed BCBS Reforms The benefits of the reform package arise from reducing the frequency, severity and public costs of financial crises and minimizing the consequent output losses. The costs arise by way of possible higher lending rates and lower overall lending. Will the benefits of more stringent regulation and supervision outweigh the potential costs? Will the result be the same in the short-run as well as in the long-run? These are the questions uppermost in everyones mind, most of all in the minds of governments and regulators. Three recent studies have addressed this question two by the Bank for International Settlements (BIS) and the third by the Institute for Industrial Finance (IIF), a Washington based private sector body which articulates the banks point of view. The BIS studies report that if the new requirements are phased in over four years, each percentage point increase in capital would reduce annual growth by 0.04 to 0.05 percentage points during the implementation period or about 0.2 per cent over the four year period. However, as the financial system makes the required adjustment, these costs will dissipate and then reverse in the medium term, and the growth path will revert to its original trajectory. To summarize, the cost-benefit calculus will possibly be negative in the short-term, albeit modestly, but will be distinctly positive in the medium to long term. The IIF study estimates significantly higher sacrifice ratios. According to this study, the G3 (US, Euro Area and Japan) will, if they implement the reform package in full, lose growth of up to 0.6 percentage points over the five-year period 2011-15 and 0.3 percentage points over the ten-year period 2011-20. The differences between the two sets of studies stem obviously from differing assumptions. Notably, the IIF study assumes a much larger increase in lending rates but does not take into account the putative benefits arising from improvements in operational efficiency, a more resilient financial system and an executive incentive structure aligned to sustainable profitability. Such significant differences in the projection of the macroeconomic impact of the reform package should not be surprising given the weak database as also the fact that many of the relationships are non-linear. What is significant though is that notwithstanding the differences in projected outcomes, all studies agree that the benefits of a stronger and healthier financial system will be there for years to come. The Reserve Bank has also made a preliminary assessment of the impact of increased capital requirements on our GDP growth path. We will calibrate the phase in of the new standards to ensure that the sacrifice ratio is within acceptable limits

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Implementation of Basel III in India Basel III reflects the lessons of the crisis, and I believe it is going to be quite game changing. However, as I indicated, not all the reform measures are going to be binding constraints for us. Nevertheless, we should not underestimate the challenge of implementing Basel III. It will demand greater capacity on the part of both banks and the regulators. I urge this conference to flesh out the specifics in this regard. Indias prudential regulations are ownership neutral. They will be applicable u niformly to public sector banks, private banks and foreign banks. The impact of the measures will of course vary and will depend on the business model and risk profile of the banks and their domestic and overseas balance sheets. The buffers built into the reform package are expected to provide automatic stabilizers obviating the need for external support during a downturn. Also, as the buffers will be built-up over time and during the upturn of the business cycle, the system should not be unduly stretched. In the case of public sector banks, Government, as the owner, will have to contribute to building the capital buffers so as to maintain the floor of 51 per cent in the ownership. This is unlikely to put undue pressure on the Governments fiscal position as it will happen during the cyclical upturn when banks profits and Governments revenues would be buoyant. Consequently, public sector banks should anticipate no problem in building the buffers contemplated under Basel III.

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CONCLUSION
My attempt in this address has been to highlight the important components of the global reform package on bank supervision and regulation and to evaluate them from an Indian perspective. I have also given an assessment of the estimates made at the global level of the macroeconomic impact of these reform proposals. Several concerns persist some immediate and some long-term. By far the most pressing immediate concern is about the calibration of the standards and their phasing in. The BCBS and the regulators are sensitive to these concerns, and are mindful of the need to facilitate a smooth transition to the new norms, and in particular, to ensure that the more stringent capital and liquidity requirements do not impede as yet fragile recovery process. Two features of the reform package warrant special mention because of the communication effort they require. First, banks across the world are apprehensive that even as they incur the cost of building the capital buffers they will not be able to use them during a downturn, because ironically that is when markets would expect and demand higher capital. Second, some components of the reform package may have a comply or explain framework which allows individual jurisdictions to deviate from any specific provision of the package by explaining why it has made deviations. There is a risk though that even well reasoned and perfectly justifiable deviations may be interpreted as wilful noncompliance, or worse still as unwarranted regulatory forbearance, and markets may penalize such jurisdictions. What these problems basically highlight is the need for effective and timely communication to explain the rationale for opting for deviations. Central banks have traditionally attached considerable importance to communication regarding monetary policy to guide market expectations. Now regulators too need to hone their communication skills. There are many reasons cited for India having moved up to a higher growth trajectory. Most of the reasons are familiar. But
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one of the big unacknowledged drivers of Indias growth has been the impressive improvement in the quality and quantum of financial intermediation over the last decade. The Indian financial sector in general, and Indian banks in particular, can be proud of this very credible achievement. As you contemplate, during this conference and beyond, the challenge of delivering on your promise over the next decade, I urge you to think global and act local.

BIBLIOGRAPHY

BOOKS REFERRED: 1. Basel Committee on Banking Supervision, (2001), The New Basel Capital Accord, Bank for International Settlements. 2. The Economist, (2001), 'Banks New Capital Standards', January 20-26, London. 3. Mayer, L., (2001), ';The New Basel Capital Proposal';, BIS Review, No.40. WEBSITES: 1. http://www.rbi.org.in/scripts/BS_SpeechesView.aspx?Id=520 2. www.wikipedia.com 3. www.differencebetween.com 4. www.scribd.com

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